Hotel-Casino Rulings Reveal Flaws in AI Price-Fixing Allegations

The dismissal of a second price-fixing case against world-famous hotel-casinos will guide courts grappling with questions in similar suits alleging the use of algorithmic software violates antitrust law.

Judge Karen M. Williams of the US District Court for the District of New Jersey on Sept. 30 tossed a suit accusing Atlantic City hotel-casinos of inflating room rates through the collective use of Cendyn Group’s Rainmaker software.

That decision, along with the dismissal in May of a nearly identical case against Las Vegas hotel-casinos, gives judges more information to consider when evaluating other cases with similar facts and evidence, helps the defense counsel, and raises pleading standards for plaintiffs.

“There’s no doubt these have an impact on other district judges,” said William Kovacic, a law professor at George Washington University and former Federal Trade Commission chair. “The defendants in other cases, creators of the software, will look very carefully at these decisions to inform arguments.”

Private plaintiffs and US enforcement agencies have targeted hotels, apartment-management companies, and insurers, alleging illegal collusion through shared use of price-setting databases.

The US Department of Justice and the FTC earlier this year filed a statement of interest in a private antitrust class action against Yardi Systems, saying the use of pricing algorithms among competitors can be a “per se” violation of Section 1 of the Sherman Act.

The DOJ also filed a case against RealPage in August, accusing the revenue management software company of engaging in an unlawful scheme to decrease competition among landlords in apartment pricing. Multidistrict litigation against RealPage is pending in Tennessee.

The hotel-casino rulings by Williams and Chief Judge Miranda Du of the US District Court for the District of Nevada add “contours” to evolving case law on algorithmic price-fixing, like whether algorithms can be used to reach an agreement among competitors, said Diana L. Moss, vice president and director of competition policy for the Progressive Policy Institute.

“The courts in the United States are pretty good at taking traditional principles and applying them to new settings, and the new setting of course is the digital setting,” Moss said. “At the end of this, we are going to have a body of case law, where a lot of these questions are going to be answered around whether algorithms can in fact serve as a method of communication to fix prices.”

‘Factual Deficiencies’

The Atlantic City and Las Vegas cases alleged that defendants including Caesars Entertainment Inc. and MGM Resorts International fed the Rainmaker software confidential information on occupancy and pricing that was processed and analyzed by an algorithm to recommend an optimal price for room rates.

But the judges in both the Las Vegas and Atlantic City cases applied the same rationale in their dismissals, saying the hotel-casinos weren’t required to accept pricing recommendations from the Rainmaker software and were free to make their own independent decisions.

“The courts are struggling with this issue—if members of the agreement were able to deviate, what does that mean for the allegations of a conspiracy?” Moss said.

The hotel-casinos in both cases also used the software at various times, raising questions of whether there was parallel conduct and a horizontal price-fixing agreement among competitors.

The Atlantic City hotel-casinos subscribed to the Rainmaker software at different times during a 14-year period, making it “implausible that they tacitly agreed to anything, much less to fix the prices of their hotel rooms,” Williams said in her opinion, outlining various “factual deficiencies” plaguing the plaintiffs’ complaint.

The hotel-casinos also didn’t directly exchange nonpublic information using an algorithm. Williams points out that the plaintiffs didn’t allege that the hotel-casinos’ proprietary data “are pooled or otherwise commingled into a common dataset,” against which an algorithm runs and returns to each hotel individually with recommended prices.

Yet, the plaintiffs still allege that the hotel-casinos have engaged in a conspiracy to artificially raise and fix the prices of their hotel rooms, and that the conspiracy is achieved through their “knowing and purposeful shared use” of the Rainmaker products, Williams said.

“But how is their mere use of the specific software here suggestive of culpable conspiracy?” Williams asked in her ruling.

The opinion sends a “really strong message” to software providers and their users that confidential data can be lawfully shared with a provider, said David Cross, a partner in Goodwin Procter LLP’s antitrust and competition practice.

“Even if those horizontal competitors are sharing nonpublic proprietary data with a software provider, it still doesn’t violate the antitrust laws to use that software to help set prices, unless, potentially that data is pooled in some aggregated way,” Cross said.

Plaintiff Burden

Plaintiffs raising similar claims will have to plead facts about exactly how data is used once it’s handed over to a price-setting database and whether it is shared with competitors or pooled into an algorithm, said Ken Racowski, a litigation attorney at Holland & Knight LLP.

“They are going to have to have some documents or technical specs on how the software works or they are going to have a confidential informant that tells them that,” he said.

Racowski pointed to the allegations in the Atlantic City case that the hotel-casinos “knowingly provided” their nonpublic room pricing and occupancy data to Rainmaker but didn’t explain how that data was used once given to the software.

“The plaintiffs didn’t come right out and say ‘the hotels give the software confidential information and the confidential information is pooled and goes to other competitors,’” he said. “I don’t know why they couldn’t take that last step in their pleading, whether it’s because the software doesn’t actually work that way or they just don’t have the information.”

Caesars is represented by Skadden, Arps, Slate, Meagher & Flom LLP. MGM is represented by Womble Bond Dickinson LLP. Cendyn Group is represented by Latham & Watkins LLP. The plaintiffs are represented by firms including Dilworth Paxson LLP.

The cases are Cornish-Adebiyi v. Caesars Ent., Inc, D.N.J., No. 1:23-cv-02536 and Gibson v. Cendyn Grp., D. Nev., No. 2:23-cv-00140.